Dividend exchange traded funds continue to increase in popularity as income-famished investors look beyond bond markets for yield.
There has been about $12.6 billion in inflows to dividend-stock ETFs this year.
Treasury yields are falling as and bond prices are rising as investors fret over the global economy and Europe’s relentless debt crisis. Yields on the 10-year note were trading around 1.9% on Monday.
In late August “for the first time in 53 years, the S&P 500 yielded more — roughly 2.25% — than the 10-year Treasury (2.1%), and that has some investors looking more than ever to use dividend-paying stocks to deliver income,” writes Chuck Jaffe at MarketWatch.
“The difference between the dividend yield on stocks and the yield on bonds, known as the ‘yield gap,’ can be used as an indicator of the attractiveness of stocks relative to bonds,”writes Michael Rawson for Morningstar. “While the yield gap was slightly more attractive in March 2009 during the financial crisis, stocks are at their most attractive point since 1958.” [Dividend ETFs Set to Benefit From Higher Payouts.]
When seeking a dividend ETF, there are some factors to look for. Broad diversification is important, or one that is holding companies that have stable dividend payouts.
Morningstar recommends Vanguard High Dividend Yield ETF (NYSEArca: VYM), which has $1.6 billion in assets. Holdings are from solid, large-cap companies such as Exxon Mobile (NYSE: XOM) and Microsoft (NYSE: MSFT). VYM has a yield of 3.3%. SPDR S&P Dividend ETF (NYSEArca: SDY) has about $5.95 billion in assets. Top holdings are Pitney Bowes (NYSE: PBI) and HCP Inc (NYSE: HCP). SDY yields 3.4%.
Vanguard High Dividend Yield ETF
Tisha Guerrero contributed to this article.